Investing in farmland?

16 Replies

Hello all, 

My name is Frederic and I've been reading the forums for a few days now.

I currently work in the investment industry as a mutual fund sales representative and am looking at investing in real estate within a year or two. I currently own a house with my fiance and would like to diversify my assets into real estate as most of my income/assets is linked to financial markets. 

I was looking at buying some farmland in one of the western provinces as an investment. I was wondering if anyone had experience doing this? 

Here's a couple of stats for you. 

List price: 130000 (25% down over 25 or 30 yrs) 

Annual rent: 40$/acre x 160 acres =6400$

Annual taxes: 800$

Vacancy: not sure it'll ever be vacant

Lease would be paid upfront before growing season and generally on a multi year term with built in increases. 

Just looking at some pointers or things I might have missed? This would be a buy and hold and mostly counting on appreciation. 

Thanks in advance for your help! 

@Frederic Babeux , interesting topic. I've never seen this on BP before.

At 1st glance this look like a 17% cash-on-cash return, which is pretty good. Where I think this deal starts to look less attractive is:

  1. There's no depreciation on land (I don't know Canadian tax laws, so take this with a grain of salt). 
  2. Appreciation is likely to be lower than on developed land, as population/housing is what drives demand in RE.
  3. Appreciation itself is speculation, NOT investment. 

Thank you @Jaysen Medhurst , you bring some good points. As you mentionned, you cannot depreciate land in Canada, I'm guessing you guys use depreciation expenses in your income statements therefore ''reducing'' net profits?

Regarding appreciation, you are right that appreciation by itself would be speculation, but i believe that since farmland is a commodity producing asset that appreciation will be driven mostly by global population growth and not directly housing/local population growth.

I'm not too familiar with the cash on cash returns yet but let's say the land is cashflow negative after tax/mortgage, is there a way to know if the deal is still attractive?

Based on 30 yr mortgage with 25% down @ 3%, break-even would be 35.75$/acre. What if I only get 30$/acre? 

Is cash flow positive a must in every single deal ?

So you’re telling me that you’re gonna rent it for $40/acre for a whole year?

Originally posted by @Matthew Moore :

So you’re telling me that you’re gonna rent it for $40/acre for a whole year?

 That's typically how it is done.

    

@Frederic Babeux

Both of my parents are flat-landers (Manitoba) from farm families.   On both sides, the family farm was rented, then sold ... in one case to a farmer from Europe who paid an unbelievable amount per acre (and thought he was getting a steal).

   

Given these farms had been in the families since homesteading, financing was not involved, however in one instance, the rent was used to sustain my Grandmother into her 90s.   After her passing, the farm was sold.

The rent amount per acre will vary depend on the quality/location of the land and the percentage of the land which is workable.  A hundred years ago, most homesteads were quarter sections (160 acres) but frequently only a portion of that (perhaps 80 - 100 acres) was available for planting (the rest being consumed by ditches, sloughs, bluffs/shelter belts, farmyard and pasture).  Since the 1960s, the amount of "farmable" land per quarter or section has increased dramatically in some areas {at the cost of fire separation, soil heath & erosion, and habitat for wildlife} and can be as hight as 80-90%.    Farming operations have scaled correspondingly and what was the family farm of my grandparents is no longer sustainable ... in the areas where my parents grew-up, many "family" farms today are working  6 - 10 sections annually - a task that requires millions of dollars in capital equipment.

There are also farmers who are specializing in organic and/or non GMO crops (both of which may require maintaining a wide border strip between their fields and their neighbours crops).

There were (and likely still are) two principal ways of renting farm land in that area: a) straight rent per acre/quarter/section or b) a share cropping arrangement with the farmer working the land.   The latter has more risk and {potentially} more reward, but as my uncle would say: unless you grew up farming, you probably shouldn't consider share-cropping  [The same would apply to renting pasture for live-stock on a per-head share].   Even with a straight rent, you may not see a steady monthly cheque, but will receive an amount up-front, some mid-season and the remainder when the crop has been taken off.

Owning and renting farmland on the Prairies can be profitable, but you need to know what is being farmed in the area; the suitability of the land you are purchasing to the various crops; the amount of the land which can actually be planted and what the going rate is for comparable land.   I'd find an old, retired farmer in the areas and talk to her/him.

@Frederic Babeux Just some food for thought, some land that’s good for farming is HORRIBLE for home development. Lowlands are great for rice and soy but flooding is bad for homes. Rocky land is okay for cattle but typically bad for homes and crops. In the U.S. you also have complexity around subsidies impacting profitability. And profitability impacts the desirability of your land. If you really want to get funky you need to also look at (in limited cases) mineral rights, if they convey, etc. All of this is to say I have no idea if your deal is good or bad. But you’d better make sure understand the actual land you’re investing in. My two nickels anyway...

@Frederic Babeux I think this is a great way to diversify some of your assets out of paper and into a tangible asset like cash flowing real estate. Price per acre is good compared to farm land in the U.S. and the return on your investment of $32,500 down payment is probably a better return than some of your mutual funds have performed over a 10 year period. If property taxes go up, make sure to increase the rent accordingly. Best of luck.

Just want to point out this is an awesome thread & one of the many examples that there's infinite ways to use real estate to build your wealth.

@Frederic Babeux , regarding further analyzation of the deal. I recommend analyzing the Internal Rate of Return (IRR), which takes into account all the ways a property can make money over time, how long you plan to own it, and compares it to other potential investments.

There's a lot on BP about IRR.

Cashflow positive isn't a must in every deal, as long as it fits your investing strategy. There are a ton of investors in San Francisco and NY accepting minuscule Cap Rates, because they've been seeing so much appreciation.

Since depreciation is out (BTW no depreciation on land in the States either) you're really only left with appreciation (assuming no CF) and mortgage pay down. 

Your point about population growth is well taken, but remember farming has been increasing yield per acre over time. If that continues, less land is required for the same output, which would drive down agricultural land prices...in theory. I'm certainly not an economist or agriculture expert, so please don't take this as any more than the rantings of an uninformed fool.

Growing up in the country I’ve not only heard of renting the land but also negotiating for a % of the profit from crops. That’s why I was asking.

Originally posted by @Matthew Moore :

Growing up in the country I’ve not only heard of renting the land but also negotiating for a % of the profit from crops. That’s why I was asking.

 Matthew:

I attempted to address crop-sharing above.  You can rent the land for a percentage of the yield, but will also take-on a percentage of the risk.

Frederic, there's peace of mind from owning land for sure.  I'm a numbers guy and don't believe in making decisions based on peace of mind though.    I quickly solved your problem using an IRR calculation and calculated a 4.31% rate of return over time.  This rate of return is without assuming the land appreciates in value and without assuming rental rates go up.  I say this is pretty good because chances are, rental rates WILL go up over time and land values will also go up over time.  HOWEVER, this was also assuming that you don't use a land loan for your purchase.  

When you use a land loan, at 6 percent interest for $97,500(75% of 130,000), I'm afraid that this property won't be cash flow positive in the early years.  If you see rental rates go up, then it may be positive in the future...but I hate to invest in something that will cost me money each year.  

If you do go forward with it, before you lease out the land be sure to negotiate with the renter what they will be responsible for and what you are responsible for when it comes to land maintenance.  I grew up on a farm and believe me, there's maintenance involved in owning land.  Keeping trees trimmed and reduced, maintaining fence, etc.   

@Barry Hecht, you bring a good point with the negative cash flow in the early years, ideally I'd try to find something cash positive but I am not quite there yet as I'm still saving for a down payment. 

Regarding the rate on the loan, my wife has employee pricing since she works at the bank, I will most likely use a pre discount rate in my calculations though, just to make sure the deal is attractive on all aspects. 

Regarding land maintenance, chances are it will be done by the tenant plus the land I'm considering usually has very little trees around, so we'll see about that. 

Good input from everyone so far, giving me good ideas what to look for! 

I only invest in farmland, plus I also rent farmland here in Kentucky.

For the owner there is very little expense. All maintenance is done by tenant, if not just write it in your lease. land leases in my area are 200-275 per acre. If you have any specific questions or need any advice on writing the contract feel free to ask, I do it every day.

Hi, interesting thread! @Roy N. had very practical advice and I agree completely. Just wanted to clarify a few things first. Are you buying this land for 130k or is that the do? Good rentable farm land around here goes for about 10k an acre. Who are you purchasing from and why are they selling? Again good farm land is in high demand and usually goes up for auction or is sold privately. Is it currently rented or being farmed by the owner? As for financing, that's great that your wife can get you an interest rate that low on that type of loan. You'll be at an advantage for sure there. Other things to think about are property tax increases ($800 is crazy low) insurance, and carbon tax, floods, fires or any other reason you may not get it rented out. I would also be Leary breaking even or losing money on this type of purchase. You won't have the write offs or tax benefits as residential properties, so negative cash flow could really hurt you.
I hope this didn't sound negative, I might have missed something 😊

@leona n. Great input! May I ask which rm you are talking about? Most land I've seen is listed around 1k per cultivable acre and is in the gray soil zone (northern Saskatchewan). 130k would be the listed price and not the down payment. 

I will definetly try and get some land that is already rented and will try and find a deal that is cash flowing. 

Good land seems to come up once in a while, there is a lot of grassland/hayland for sale but those don't look very rentable.. 

Great input once again! 

I just looked at some of the listings and you are right, there is quite are several listings closer to the 1k. Really seems to vary depending on the property. I hope you are able to find a cash flowing piece of land, good luck.

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